Budget development and management within departments

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1 V I C T O R I A Auditor General Victoria Budget development and management within departments Ordered to be printed by Authority. Government Printer for the State of Victoria No. 39, Session

2 ISSN ISBN X

3 The Hon. Monica Gould MP President Legislative Council Parliament House MELBOURNE The Hon. Judy Maddigan MP Speaker Legislative Assembly Parliament House MELBOURNE Under the provisions of section 16AB of the Audit Act 1994, I transmit my performance audit report on Budget development and management within departments. Yours faithfully J.W. CAMERON Auditor-General 26 May 2004

4 v Contents FOREWORD... vii 1. EXECUTIVE SUMMARY Background Conclusion INTERNAL BUDGETING, AND THIS AUDIT State and internal budgets State budget process The internal budget process Departments audited This audit Audit scope Audit methodology ARE BUDGETS INTEGRATED WITH BUSINESS PLANS? Integration of business planning and internal budgeting Is internal budgeting linked to corporate and business planning? Is internal budgeting based on output delivery targets? Do workforce plans adequately complement internal budgets? Are individual performance agreements linked to business plans? ARE PROCESSES TO DEVELOP INTERNAL BUDGETS ADEQUATE? Elements of budget development Are adequate annual guidelines produced? Are responsibilities appropriately allocated? Are budget preparation approaches appropriate? Are budget preparation tools appropriate? Are budget development processes adequately reviewed? What are the other characteristics of budget development? ARE BUDGETS ADEQUATELY MANAGED AND REVIEWED? Managing and reviewing budgets Is monitoring of revenue and expenditure against budgets adequate? Is external reporting of performance against budgets adequate? What are the other characteristics of budget management and review? Performance against budget for Department of Education and Training Department of Infrastructure... 49

5 vii Foreword Departments and agencies are expected to manage their annual appropriation efficiently and effectively in order to deliver the goods and services required by government. This requires departments, amongst other things, to have sound internal budget development and management practices, and for internal budgets to be integrated with business planning processes. This audit sought to answer the question: How efficiently and effectively are internal budgets developed and managed? With some minor exceptions, internal budget development and management practices currently used by the Department s of Education and Training and Infrastructure, are substantially in line with better practice. For the other departments, this report details the characteristics of effective budget development, management and review. These characteristics can be used as a checklist to achieve better practice. J.W. CAMERON Auditor-General 26 May 2004

6 1 1. Executive summary

7 Executive summary Background The government sector has 2 budgeting processes. One, the State budget process, which draws together the Government s estimates of revenue and expenditure for the budget year. This is called the external budget (in this report), and provides appropriations to departments to deliver outputs (goods and services). The second, a departments own budget setting process, we have called the internal budget. It is part of a department s internal financial management and is important for business planning, resource allocation and performance management. This audit examined the efficiency and effectiveness of internal budgeting processes and practices within the Department of Education and Training and the Department of Infrastructure, with a focus on: the integration of internal budgeting processes with business planning the development and management of internal budgets monitoring and reviewing budget performance. The audit focussed on the internal budget processes for the financial year and changes in practice implemented for the budget cycle. The audit covered work undertaken by the 2 Departments from 2001 onwards. The audit did not examine those processes associated with the preparation of budget estimates for, nor each department s participation in, the State s budget process. 1.2 Conclusion Sound budgeting requires the integration of business planning (corporate, business, workforce and staff performance plans) with internal budgeting. This integration was substantially achieved by the 2 departments. In , for the first time, divisions and offices of the Department of Education and Training linked their business plans to the department s strategic direction. However, at the time business plans were prepared, the department s strategic directions had not been finalised. The business plans were not re-visited to ensure they were consistent with the department s strategic directions once established in July and August. Both departments link their corporate and business planning activities to the relevant output delivery targets specified for each department in the State budget process. However, both developed their internal budgets based on their organisational structure rather than on output delivery targets. This practice should be re-examined to shift managements focus beyond resource management to one of delivering promised services.

8 4 Executive summary Aside from some minor departures, both departments had appropriate processes to develop their internal budgets. For example, both had a dedicated budget team, formal policies and budget committees. There are some budget development aspects that need to be addressed. In , the Department of Education and Training had 237 budget responsibility centres compared to 20 at the Department of Infrastructure. The number of centres should be set at a level that enables the organisation to deliver services efficiently and effectively while maintaining appropriate accountability for performance. On face value, the number of budget centres established by the Department of Education and Training appears high. Further, the Department of Education and Training had not periodically benchmarked its internal budget development process against other departments with a view to improving efficiency and effectiveness. The budget methodology adopted by the Department of Education and Training for setting its internal budget was mainly based on the traditional cost plus approach. As this method was found to impact on the rigour of the department s budget base, for it changed to zero-based budgeting. This facilitated the prioritisation of programs, the calculation of program delivery cost from the bottom up, identification of savings opportunities and identification of options for resourcing programs. For savings impact statements were prepared, for the first time, to provide the department with a long-term view of savings options and risks to their achievement. The Department of Education and Training had not formally evaluated how well its budget management system meets the needs of its managers. Both departments had substantially adopted adequate practices for managing and reviewing internal budgets. However, some aspects could be improved. At the Department of Education and Training in , important information, consistent with best practice, was not included in monthly reports of the department s budget performance presented to executive management. For example: balance sheets and cash flow statements were only reported in the department s annual report financial performance against output delivery targets. Since September 2003, this information has been included in monthly budget performance reports.

9 Executive summary 5 At the Department of Infrastructure, since April 2003 monthly and quarterly budget reports have been progressively improved by the inclusion of forwardlooking financial information such as future risks and risk management strategies. Including explanations for material variations between actual results and budgeted estimates in the department s annual report would improve departmental accountability and transparency. Both departments failed to achieve their budget forecast for For the Department of Education and Training, the result was largely affected by an incorrect external budget base. Some poor budgeting practices adopted at that time were also likely to have contributed to the result. In recognition of the need to improve, over the past few years a range of actions have been taken by the department aimed at improving the efficiency and effectiveness of its internal budget development and management practices. Overall, the budget practices are now substantially in line with better practice. The Department of Infrastructure s budget result was largely attributable to certain events which could not have been reasonably forecast by the department at the time of developing its budget. Overall, the department s internal budget development and management practices are substantially in line with better practice. Recommendations 1. The Department of Education and Training and the Department of Infrastructure should: align their internal budgets to output delivery cost targets modify their financial management information systems to show budget and actual results against output delivery targets, in addition to the current practice by expenditure categories. 2. The Department of Education and Training should regularly assess whether the number of budget responsibility centres it has is appropriate, considering both accountability requirements and the cost of maintaining the centres. 3. The Department of Education and Training should evaluate whether the Advisor budget management system meets the needs of its managers. 4. The Department of Education and Training should regularly benchmark its internal budget development processes with a view to assessing the efficiency of these processes. 5. The Department of Infrastructure should include explanations of significant variations between actual results and budget estimates in its annual report (Budget Portfolio Outcome Statements).

10 6 Executive summary RESPONSE provided by Secretary Department of Treasury and Finance The department welcomes the Auditor-General's Report on Budget development and management within departments. The Victorian Public Sector has made substantial inroads to budget formulation and is recognised internationally as being at the forefront of reform. Given the importance of this topic and its interconnection with the development of the State Budget, the Report adds to the ongoing consideration of budget development and management. However, the Report somewhat over simplifies the complex and sophisticated processes of budgeting that all departments utilise. The scope of the performance audit is focused on specific and narrow control aspects of output budgeting. It excludes detailed examination of capital budgeting processes and the overall frameworks that apply to departmental budgeting, therein missing a critical component of the budgeting process. As a result, the Report does not acknowledge or examine capital management or significant outturn/output improvement interventions and initiatives, such as Gateway. The limited focus of the Report reduces the general applicability of the suggested improvements and recommendations, and the ability of departments to action and implement these improvements to their budgeting processes. The Report does however provide some salient aspects for operational issues at the departmental level.

11 7 2. Internal budgeting, and this audit

12 Internal budgeting, and this audit State and internal budgets The government sector has 2 budgeting processes. One, the State budget process, which draws together the Government s estimates of revenue and expenditure for the budget year. This is called the external budget (in this report), and provides appropriations to departments to deliver outputs (goods and services). The second, a departments own budget setting process, we have called the internal budget. It is part of a department s internal financial management and is important for business planning, resource allocation and performance management State budget process The State budget process is underpinned by the submission of budget bids to the government 1 by departments. This involves a 2-stage process. In undertaking their annual budget development processes, departments are required to update their forward estimates each November to feed into Stage 1 budget deliberations. As part of this process, the Department of Treasury and Finance seeks information from departments to assist in adjusting the aggregate budget sector forward estimates to take account of post-budget government decisions, revisions to current economic parameters and other relevant factors. In the Stage 2 process, the Department of Treasury and Finance and the Department of Premier and Cabinet present briefs to the government on submissions for new output (goods and services to be delivered) and asset initiatives. The government may consult with the broader community and special interest groups before coming to decisions on which outputs to purchase for what price and the allocation of resources for new fixed asset investment projects. The decisions arising out of these processes, subject to formal Cabinet approval, form the basis of departmental budgets and the annual state budget. 1 These processes are undertaken by the Expenditure Review Committee, established in 1999 as a sub-committee of Cabinet. It is responsible for monitoring all government funding decisions.

13 10 Internal budgeting, and this audit The internal budget process The internal budget process starts with the requirement by departments to deliver outputs. These are included in the department s corporate and business plans as service delivery targets and priorities. Internal budgeting is affected by external changes where, for example, parliamentary appropriations to purchase outputs are increased or reduced by government. The internal budget process is an ongoing cycle and shown in Figure 2A. FIGURE 2A: INTERNAL BUDGET PROCESS Outputs and/or services Corporate plans and priorities External constraints/ budgets Develop internal budget Undertake activity Review and manage performance Source: Internal Budgeting Better Practice Guide, Australian National Audit Office, February The 3 main components of an internal budget process are: develop internal budget: from developing budget policies and guidelines through to departmental executive management approval of the budget undertake activity: executing business plans in line with the internal budget review and manage performance: monitoring and modifying the budget and holding managers accountable for performance.

14 Internal budgeting, and this audit 11 An effectively managed internal budget process: clearly communicates to staff the department s priorities identifies any financial risks to achieving the department s objectives underpins the accurate and informed allocation of resources provides accurate and timely financial and performance information to support decision-making and performance measurement enables the department to identify and respond to changes in business and environmental conditions Departments audited Two departments were examined in conducting this audit: the Department of Education and Training and the Department of Infrastructure. The Department of Education and Training manages the education and training system in Victoria and provides education and training services through schools, tertiary and further education institutes and adult community education. The department has 4 Offices (School Education; Finance Strategy and Resources; Portfolio Integration; and Training and Tertiary Education) and oversees 8 statutory bodies. In , the department was allocated a budget (output appropriations) of $5.7 billion, ( , $5.4 billion). The Department of Infrastructure manages major infrastructure projects, including the provision of public transport services, information and communication technology (ICT), energy and security. Prior to machinery of Government changes in December 2002, the department had 7 business divisions (Planning, Heritage and Building; Public Transport; Infrastructure Projects; Major Projects; Strategic Planning; Ports and Marine; and Local Government and Regional Services). These divisions were supported by 2 corporate divisions (Corporate Finance and Organisational Development). It also had 7 regional offices, providing services in planning, local government, public transport and major projects. In , the department was allocated a budget (output appropriations) of $ 2.4 billion ( , $2.6 billion). As a result of machinery of government changes, a number of functions were transferred out of the department (strategic land use planning, heritage, building and local government) and new functions (multimedia and energy policy) transferred to the department. 2 Australian National Audit Office, Internal Budgeting, Audit Report No. 52 Australian National Audit Office, Commonwealth of Australia, 2002, Canberra, ACT.

15 12 Internal budgeting, and this audit 2.3 This audit Audit scope This audit examined the efficiency and effectiveness of internal budget processes and practices within the Department of Education and Training and the Department on Infrastructure. In particular, it examined: integration with strategic and business planning processes: how internal budgeting processes are integrated with strategic planning (which sets the priorities), aligned with the output delivery targets in the state Budget papers, and supported by financial management processes budget development and management processes: how efficient and effective these processes are, including how well technology supports the processes and provides the necessary tools for them performance monitoring and reporting framework: how well performance against internal budgets is analysed, how well information is used to monitor and report, and adequacy of public accountability. Within each department, the central budget unit and a selection of other operational units were examined. This examination covered revenue and expenditure (operating and capital). The audit did not examine processes to prepare budget estimates for the state s budget process (including costings of capital projects), nor each department s participation in that process. The state s budget process draws together the Victorian Government s estimates of expenses and revenues for the budget year and leads to the State budget 3. The audit focused on the internal budget processes for the financial year and any changes in practices for preparing internal budgets. Given the lead-time departments need to prepare business plans and frame budgets, the audit covered work by the 2 departments from 2001 onwards. In assessing the budgeting practices of the 2 Victorian departments, extensive use was made of the publication Internal Budgeting Better Practice Guide produced by the Australian National Audit Office in February The legislative and administrative arrangements associated with parliament appropriations were evaluated in the Victorian Auditor-General s special report Parliamentary control and management of appropriations, April 2003.

16 Internal budgeting, and this audit Audit methodology The audit comprised: a detailed examination of the internal budgeting policies and procedures in the selected agencies compared with the Australian National Audit Office s Internal Budgeting Better Practice Guide interviews with departmental staff from central budget units, as well as other staff involved in budget processes. The audit was performed in accordance with Australian Auditing Standards applicable to performance audits, and included such tests and other procedures considered necessary in the circumstances. Specialist advice was provided by Mr Peter Gunning of PJ Gunning and Associates. I am grateful for the support and assistance provided to my officers by the management and staff of the Department of Education and Training, the Department of Infrastructure, and the Department of Treasury and Finance.

17 15 3. Are budgets integrated with business plans?

18 Are budgets integrated with business plans? Integration of business planning and internal budgeting A department s business planning process results in long-term and short-term plans for the whole department, its divisions, units and individual officers. To be successful, business plans must be backed by financial plans developed through a sound internal budgeting process. If business planning and internal budgeting are not integrated, there is a risk of too few (or too many) resources being allocated to tasks or programs, or of a department s resources not being used to advance the initiatives contained in its business plans. Figure 3A shows the ideal relationship between departmental business planning and internal budgeting processes. FIGURE 3A: INTEGRATED DEPARTMENTAL BUSINESS PLANNING AND BUDGETING Corporate plan High level plan that identifies the organisation's role, key goals and targets over 3-5 years, consistent with meeting the needs of the government and parliament. Annual business plan and budget Outline the operational activities to be undertaken in the year to deliver the strategies (consolidated from work plans areas). Incorporate whole-of-organisation budget for the year consistent with Budget papers. Work areas' annual business plans and budgets Outline the operational activities to be undertaken in the year by the work area and how they contribute to the department's outputs and goals. Also include key performance indicators and targets. Incorporate budget for the year and future year forecasts or projections. Individual performance agreements Outline expected performance for the year, including targets and planned development. Incorporate financial management responsibilities and link financial management performance to remuneration. Source: Based on Internal Budgeting Better Practice Guide, Australian National Audit Office, February 2003.

19 18 Are budgets integrated with business plans? Is internal budgeting linked to corporate and business planning? Both the Department of Education and Training (from ) and the Department of Infrastructure have an annual planning and budget cycle in line with the government s integrated management cycle 1. Their business planning processes result in annual business plans at the departmental, office (at the Department of Education and Training) and divisional levels. These are linked to longer-term corporate plans. Business plans are complemented by staff performance plans, so that each staff member can see their contribution to the goals and objectives of the department and the delivery of its programs. Department of Education and Training In , the Department of Education and Training (and particularly the Office of School Education and Office of Training and Tertiary Education) improved its business planning processes. For the first time all divisions, regions and other entities within the department were required to develop draft divisional business plans for These plans provided the building blocks for the Departmental Business Plan and submissions to the State budgetary process and the budgetary cycle within the department. At the time divisions prepared their business plans, full information on the strategic directions of the department was not available. Offices and divisions were advised to rely on their own understanding of the department s strategic directions, pending finalisation of the key strategic documents. However, the business plans were not re-visited to ensure that they were consistent with the department s strategic directions once established in July and August In , considerable effort was put into addressing the inadequacies discussed elsewhere in this report. Development of the department s budget built on this work. Each division, for fiscal , was required to develop a zero-based budget and justify spending in each program area as well as identify a number of saving strategies. The department s business planning process also aimed to ensure that offices and divisions were aware of risks to their ability to deliver specific programs (which would reduce their ability to achieve departmental objectives, goals and targets). 1 Integrates decision-making in relation to the government s policies and strategies with decisionmaking on resource allocation and delivery of outputs. It comprises 4 elements which, taken together, form a continuous cycle of planning, resource allocation, service delivery and accountability.

20 Are budgets integrated with business plans? 19 There was good consistency between the department s business plan and its internal budgets. The objectives in the 4 office statements 2 were derived from the department s corporate plan. Divisional business plans were derived from the office statements. Spending on programs in divisional business plans was justified using zero-based budgeting techniques. There was, therefore, a direct link between spending and the department s objectives. The divisional business plans were reviewed by the department s Strategic Policy and Resource Division and the Performance Review Evaluation and Audit Division (in June 2003) for alignment with the department s objectives, goals, targets and policy statements. Several shortcomings were identified. For example, Divisions had not consistently used the overarching policy context, and there was little evidence of integrated planning and performance measurement within offices and across the department. The department has now substantially addressed these matters. Our review of all 4 draft office statements and divisional business plans for confirmed the department s findings. We also found that: divisional performance measures were mostly statements of actions to be taken for programs described in business plans, and not actual performance measures the department s planning process for had not been completed on time, due mainly to a pending restructure of the department announced by the minister in August The department's annual business plan is expected to be completed around mid-february 2004 and covers an 18-month period through to June Department of Infrastructure The development of the Department of Infrastructure s internal budget was fully integrated with the corporate and business planning process. Divisional business plans were consistent with the department s corporate plan and annual business plan. Internal budgets cost the resources required to deliver the divisional business plans. The machinery of government changes following the November 2002 state election has affected the business planning process. This has resulted in staff changes and a range of new planning processes. Given these changes, the timelines associated with the business planning processes have been extended. This has also required revisions to the corporate plan. These were completed in October Sets out the objectives and strategies to achieve the department s and the government s goals, targets and key outcomes within budget.

21 20 Are budgets integrated with business plans? Is internal budgeting based on output delivery targets? Both the Department of Education and Training and the Department of Infrastructure link their corporate and business planning activities to the relevant output delivery targets specified for each department in the state Budget papers. The department s business planning processes require offices (of the Department of Education and Training) and divisions (of the Department of Infrastructure) to specify in their business plans the outputs that each is responsible for (or contributes to) and which output delivery targets are addressed by each office s or division s strategies and programs. This requirement is intended to ensure that resources are available to implement programs that deliver against the department s output targets; and to link divisional business plans to output delivery targets. Both departments developed their internal budgets around their organisational structures, rather than on the output delivery targets in the Budget papers. Because most managers manage particular program budgets on a daily basis, they focus on these budgets and not on output delivery targets. Each quarter, a spreadsheet is used to reconcile individual divisional budgets to the Budget paper outputs. Thus internal budgets were not automatically aligned to Budget paper outputs. In the financial year, the Department of Education and Training implemented the Advisor 3 budget management system to overcome past difficulties in reconciling internal budgets with the Budget paper output delivery targets. Given that output budgeting has operated in Victoria for more than 5 years, we were surprised that the financial management information systems of the 2 departments do not show, on a monthly basis, budgets and actual results against the output delivery cost targets. While departmental budgeting and reporting should map resources and costs to an organisational structure (because this is how authority to spend and deploy resources is generally specified), consistent with better practice, internal budgeting and reporting should also be aligned to the Budget papers output delivery targets, because they represent key public and budget accountability measures for departments. 3 Proprietary brand (Advisor Series Enterprise Budgeting Solution) used to develop, control and monitor budgets.

22 Are budgets integrated with business plans? 21 Recommendation 1. The Department of Education and Training and the Department of Infrastructure should align their internal budgets to output delivery cost targets modify their financial management information systems to show budget and actual results against output delivery targets, in addition to the current practice by expenditure categories. RESPONSE provided by Secretary Department of Education and Training The department recognises that it is funded on an output basis and it is appreciated that the need to manage on this basis is important. The department monitors and reports on budgets versus output delivery targets on a monthly basis through reports to the department s executive. It remains impractical for the department to completely align internal budgets to output delivery costs as many programs apply to multiple budgetary outputs. Notwithstanding this, reports are tabled on a monthly basis to the department s executive on progress against budget for both the department s internal business units and budgetary outputs, through a budgetary reconciliation. Further, all offices and divisions within the department align their activities to budgetary outputs through their business plans. This allows for the reconciliation of program budgets with budgetary outputs, which is then reported to the department s executive. RESPONSE provided by Secretary Department of Infrastructure The department notes that: examination of the alignment between internal budgets and output delivery cost targets occurs as part of setting Divisional and Agencies annual budgets budget and actual results against output delivery targets are reported every quarter with variances analysed and appropriate management action taken Do work force plans adequately complement internal budgets? Work force plans identify the direct resources (such as time in hours or equivalent full-time days) and indirect resources (such as corporate overheads, leave and staff development on-costs) required to deliver on the activities in business plans. They are an essential complement to internal budgets.

23 22 Are budgets integrated with business plans? Our consideration of work force planning in the Department of Education and Training did not include schools; this was examined in our November 2001 report Teacher work force planning, which concluded that: current work force planning activities by the department have been limited in their effectiveness due to a lack of focus on both government and nongovernment sectors and particular segments of the teacher labour market while most schools under take some form of work force planning as part of their local school-based management responsibilities, integrated information and planning tools, better training and support, are required. The status of our recommendations in that report was recently followed-up in our November 2003 Report on Public Sector Agencies. The report concluded that the department has made progress in implementing the recommendations made in the 2001 performance audit report on Teacher work force planning. However, the department still needed to take further action in a number of areas. The Department of Education and Training s business plans set out the staffing requirements (including the number of equivalent full-time staff and their classification) for its program activities. Divisional budgets were supported by work force plans which established (based on current staffing profiles) each staff member s contribution to the delivery of divisional objectives and programs. The Department of Infrastructure had developed a work force plan to implement its corporate plan. The budgets of both the Department of Infrastructure and Department of Education and Training (excluding schools) were supported by work force plans, and these plans were adequately linked to departmental corporate and business plans.

24 Are budgets integrated with business plans? Are individual performance agreements linked to business plans? Individual performance agreements that derive from business plans and budgets show staff how their own performance links with departmental goals and objectives. Individual performance plans are part of a department s performance management function. At both the Department of Education and Training and the Department of Infrastructure, individual performance agreements were adequately linked to the departments strategic goals and priorities in that performance objectives were based on the business plan.

25 25 4. Are processes to develop internal budgets adequate?

26 Are processes to develop internal budgets adequate? Elements of budget development The publication Internal Budgeting Better Practice Guide, produced by the Australian National Audit Office in February 2003, details the characteristics of effective budget development. This Guide was used to assess the adequacy of internal budget development processes at the Department of Education and Training and the Department of Infrastructure. Figure 4A shows the 8 characteristics used and our assessment of practices against these characteristics. FIGURE 4A: BUDGET DEVELOPMENT SCORECARD, Characteristics of effective budget development Is there a dedicated budget team? Provides a central point of reference and advice for those who prepare and manage budgets. Is there a formal policy about internal budgeting? Outlines the purpose and objectives of internal budgeting, and clarifies the responsibilities of staff involved. Are adequate annual guidelines produced? Ensures that those who prepare budgets work to the same priorities, assumptions and constraints, and that budget proposals reflect the organisation s strategic directions and priorities. Are responsibilities appropriately allocated? Budget centres are responsible for preparing their own budgets. Are budget preparation approaches appropriate? Exhibits characteristics of zero-based budgeting and activity-based budgeting. Are budget preparation tools appropriate? Budget preparation software which is integrated with the organisation s financial management information system. Have budget committees been established? Oversee budget processes, evaluate budget bids, and develop and approve policies. Are budget development processes adequately reviewed? Can include occasional or ongoing self-assessment (using, for example, the Australian National Audit Office s Better Practice Guide), internal audit reviews or larger, formal evaluations. Legend: Yes To some extent No Source: Victorian Auditor-General s Office. Department of Education and Training Department of Infrastructure Comments on departures from recognised best practice or changes in the development of the budgets are outlined in the following paragraphs.

27 28 Are processes to develop internal budgets adequate? Are adequate annual guidelines produced? Annual guidelines ensure that those who prepare budgets work to the same priorities, assumptions and constraints, and that budget proposals reflect the organisation s strategic directions and priorities. Guidelines should cover: how the internal budget integrates with the planning cycle and external budget process organisational priorities for the next budget the methodology to be used to develop internal budgets key business principles, assumptions, parameters, priorities and guidance on new initiatives staffing strategies commentary on how to budget for, and manage, specific expenditure items data capture process to be followed the internal budget timetable key contacts and lines of accountability. Department of Education and Training s guidelines did not provide guidance on how to treat fixed charges (such as depreciation). Details of the preferred budget methodology, or when and why different methodologies should be used, were also not included. However, the guidelines now include information covering the budget methodology to be applied. Department of Infrastructure s guidelines for did not provide guidance on how to treat fixed charges (such as depreciation, capital asset charges and office accommodation cost) at the Divisional level. However, the guidelines now include this information to improve consistency across budget centres. The department s intranet also provides business planning support information, including business planning templates, a business plan reporting system, government and department strategy documents (including timelines), and information and links about how to develop divisional budgets. RESPONSE provided by Secretary Department of Infrastructure The department notes that the audit findings shown in Figure 4A Budget Development Scorecard refer to the financial year. Substantial improvements to guidelines and training occurred in for use across divisions and agencies. Extensive tools are disseminated via the department s intranet and forums held directly with departmental staff as part of the annual business planning process to ensure consistency and alignment to the department s strategic directions and priorities.

28 Are processes to develop internal budgets adequate? Are responsibilities appropriately allocated? If managers develop their own budget, they will have a keener sense of what things cost, and be better able to oversight the budget. In , the Department of Education and Training had 195 business units (offices, divisions and agencies) and 237 budget responsibility centres. Divisional budget officers in each business unit prepared budgets. The Department of Infrastructure had 20 budget responsibility centres (divisions, regions and agencies) in Each centre was responsible for preparing its internal budget. The number of cost centres should be set by reference to the organisation s accountability framework but at a level that enables the organisation to deliver services efficiently and effectively while maintaining appropriate accountability for performance. On face value, the number of responsibility cost centres for the Department of Education and Training appears high. Budget responsibilities at both departments were effectively communicated in writing and through performance agreements. Recommendation 2. The Department of Education and Training should regularly assess whether the number of budget responsibility centres it has is appropriate, considering both accountability requirements and the cost of maintaining the centres. RESPONSE provided by Secretary Department of Education and Training The department undertakes regular reviews of its budget responsibility centres to ensure that they meet the needs of its business, considering accountability requirements and the cost of maintaining the centres. The department accepts the recommendation to continue this process Are budget preparation approaches appropriate? Organisations take different approaches to budgeting, with some of the more common being: traditional (or incremental) budgeting, where previous year s budget or actual results provide a base line for the current year (adjustments being made for known changes in activity levels or inflation) zero-based budgeting, where budget items are justified and prioritised as though budgeted activities are being undertaken for the first time

29 30 Are processes to develop internal budgets adequate? activity-based budgeting, where the focus is on activities necessary to deliver services or outputs Kaizen budgeting, where budget estimates are based on planned improvements rather than on current practices. Current practices are analysed for potential improvements (like better operating procedures or work processes). The budget includes the cost of implementing changes, and expected savings Rolling or continuous budgeting, where budgets are prepared several times a year (such as quarterly) or are built up (for example, monthly) taking account of seasonal variations. No one budgeting approach is appropriate in all cases. Traditional budgeting may be suitable and effective as long as individual budget components are periodically reviewed and revised, in light of new circumstances and information. However, for new projects, initiatives or policy, activity-based budgeting or zero-based budgeting processes are essential to ensure that budget estimates and costings are accurate, and can be integrated with other budget requirements. Department of Education and Training In , the Department of Education and Training mainly used traditional budgeting practices for setting internal budgets. This was found to be inadequate given the budget pressures faced by the department and its failure to meet budget forecasts over the past 3 financial years. As a result, the department adopted zero-based budgeting for its internal budget. This was a more appropriate methodology than the traditional approach because it provided divisions with the opportunity to: prioritise programs calculate the cost of delivering programs from scratch make sure resources were used to achieve objectives identify inefficiencies and opportunities for savings identify options for resourcing programs. As well as zero-based budgeting, the department prepared, for the first time in , savings impact statements. These detailed: proposed savings between and how savings proposals would be implemented risks to implementing savings proposals.

30 Are processes to develop internal budgets adequate? Are budget preparation tools appropriate? An efficient and effective internal budget process needs good development tools. For greatest efficiency, budget preparation software should form part of (or interface with) an organisation s financial management information system. Both departments use the Advisor 1 budget management system to develop, control and monitor internal budgets. It interfaces with the ORACLE Financials 2 management system. The Department of Education and Training has used Advisor since , while the Department of Infrastructure has used Advisor since Both departments have sufficient controls in place to ensure that data transfers between the financial and budget systems are complete and accurate. Several managers we interviewed at the Department of Education and Training had not been adequately consulted about their financial information needs. Several divisions had to use other methods (like Microsoft Excel spreadsheets) to generate information not provided by the budget management or financial management systems. The department relies on informal (rather than formal) processes to help managers identify and address aspects of their financial responsibilities. Although the Advisor budget management system had been in use for over a year at the Department of Education and Training, there has been no formal evaluation of whether the system meets the needs of its managers. Recommendation 3. The Department of Education and Training should evaluate whether the Advisor budget management system meets the needs of its managers. RESPONSE provided by Secretary Department of Education and Training The department accepts this recommendation. 1 Proprietary brand (Advisor Series Enterprise Budgeting Solution) used to develop, control and monitor budgets. 2 Proprietary brand (Oracle Corporation) general ledger system.

31 32 Are processes to develop internal budgets adequate? Are budget development processes adequately reviewed? Budget development processes need to be periodically reviewed to ensure that they are efficient, effective and meet the organisation s goals. Review processes can include occasional or ongoing self-assessment (using, for example, the Australian National Audit Office s Better Practice Guide), internal audit reviews or larger, formal evaluations. It is important for departments to carefully manage the level of resources applied to the development of the internal budget. The level of resources should be determined in light of each department s circumstances and, in particular, should not unnecessarily tie up resources required for the effective delivery of services. The Department of Education and Training has not regularly benchmarked its internal budget development processes against other departments to gauge the efficiency and effectiveness of its budget management practices. It was however able to quantify the resources used (days of effort, cost and staff involved) to develop its internal budget whereas the Department of Infrastructure was not (except for its Budget Management Unit). The results are similar to the findings of an Australian National Audit Office survey of 50 Commonwealth Government agencies. Nearly all those agencies surveyed considered that preparing or evaluating budgets were the most timeconsuming and costly stages, and involved the most staff. Recommendation 4. The Department of Education and Training should regularly benchmark its internal budget development processes with a view to assessing the efficiency of these processes. RESPONSE provided by Secretary Department of Education and Training The department accepts this recommendation.

32 Are processes to develop internal budgets adequate? What are the other characteristics of budget development? Further details of the other characteristics of effective budget development are as follows: Dedicated budget team: coordinates and monitors the preparation process and provides support, advice and guidance Formal policy: sets down in writing the purpose and objectives of internal budgeting, and clarifies the responsibilities of staff involved. The organisation s senior management approves formal policy Budget committees: are used by many organisations. Key functions are to develop and approve budget policies and guidelines, oversee budget processes, liaise with operational areas about budget processes and proposed changes to budgets, assess revenue and expenditure initiatives, and monitor and review budgets.

33 35 5. Are budgets adequately managed and reviewed?

34 Are budgets adequately managed and reviewed? Managing and reviewing budgets The publication Internal Budgeting Better Practice Guide, produced by the Australian National Audit Office in February 2003, details the characteristics of effective budget management and review. This Guide was used to assess the adequacy of internal budget management and review processes at the Department of Education and Training and the Department of Infrastructure. Figure 5A shows the criteria used and our assessment of practices against these criteria. FIGURE 5A: BUDGET MANAGEMENT AND REVIEW SCORECARD, Characteristics of effective budget management and review Is monitoring of revenue and expenditure against budgets adequate? Involves comparing actual performance with the approved budget, identifying significant variances between actual results and approved budget estimates and implementing action, if required, in relation to these variances. Are reviews and revisions adequately managed? Changes to budgets, including approved variations, to reflect changes in estimates and circumstances should be kept to a minimum. Is external reporting of performance against budgets adequate? Involves monthly and quarterly reporting to the Department of Treasury and Finance and in departmental annual reports. Legend: Yes To some extent No Source: Victorian Auditor-General s Office. Department of Education and Training Department of Infrastructure Comments on departures from recognised best practice or changes in the management and review of the budgets are outlined in the following paragraphs.

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